As we approach the end of the year, we have been reviewing our preferred funds for the year ahead.
Academic research tells us that it is simply not possible to consistently select the ‘best’ investment funds or identify ‘star’ fund managers. Our research process aims to find investment funds that are most likely to deliver consistent performance.
What is more important than fund selection is getting the right asset allocation to meet the goals and objectives of an individual investor.
Once we have determined a suitable strategic asset allocation model to meet these goals, we can populate each asset class with investment funds.
Our fund selection process aims to identify funds that demonstrate risk managed returns combined with a low total expense ratio; these funds are typically preferred by our research process.
We use a custom ‘quant screen’ to review the entire universe of collective investment funds, which are divided into relevant IMA sectors before we apply our research criteria to each and every fund.
This quantitative screening method puts us in a strong position to then consider the highest scoring funds in greater detail, reviewing the various qualitative factors before selecting suitable funds.
As we look ahead to 2013, our preferred funds remain largely unchanged from 2012.
This is a recurring strength of our fund selection methodology; that we rarely need to recommend our clients change the funds they hold in their portfolios, minimising trading costs and tax liabilities.
At the start of 2013, we only plan to replace a couple of funds within our model portfolios.
GLG Japan CoreAlpha
GLG Japan CoreAlpha will be replaced with Schroder Tokyo.
The performance of GLG Japan CoreAlpha over the last twelve months has been abysmal. It delivered performance of -10.47% over the past twelve months, compared to a sector average of 1.52%.
The fund remains first quartile over five years, but has unfortunately fallen into fourth quartile for one and three years.
We did consider replacing it with Aberdeen Japan Growth which our quantitative research suggested was a good alternative, scoring 90% of the maximum available score across the areas of consistency, charges and volatility.
However, the management tenure at Aberdeen Japan Growth is very short, and our preferred approach is to select funds where the management team has been in place for at least two or three years.
We are therefore replacing GLG Japan CoreAlpha with Schroder Tokyo, another fund which scores highly on our quantitative research.
The manager has been in place for nearly nine years. The fund size is £775m, which suggests it is sustainable longer term. Over the past few years, the fund has been less volatile than its benchmark.
Fidelity South East Asia
Another fund we have chosen to replace for 2013 is Fidelity South East Asia, which no longer appears in the top 20 of our quantitative research. Whilst this fund has only marginally underperformed its sector average over the past year, our research suggests that better alternatives exist for our clients.
The top rated fund in our research for 2013 is Newton Asian Income; a strong performer in recent years. We dismissed this fund due to the short tenure of the current manager, Jason Pidock.
We have decided to replace Fidelity South East Asia with First State Asia Pacific Leaders for 2013.
As well as scoring highly in our quantitative research, First State has lower ongoing charges (1.56% compared to 1.78%). It offers a lower portfolio turnover rate (40% compared to 140%), and takes a higher conviction approach to stock selection (44% in top ten holdings compared to 29% for Fidelity).
Other funds
Our preferences for funds in all of the other relevant IMA sectors remain the same for 2013, with the funds we have been using in 2012 continuing to score highly and give us confidence they are the most suitable choice for our clients.
We are making some other adjustments to our wealth management proposition for the year ahead, which will see us recalculating the strategic asset allocation positions we use, aligning these with the FTSE APCIMS Private Investor Index Series.
The index series represents the performance for growth-orientated, income, balanced and conservative investors, incorporating returns from FTSE indices representing UK equities, foreign equities, fixed income, commercial property and cash, with variable percentage weightings set by committee and based upon average allocations across private client investment managers.
We intend on adapting the APCIMS models to replace the small amount of hedge fund allocation with commercial property.
As a result of this change to the strategic positions, we will be removing M&G Strategic Corporate Bond from our recommended models and instead allocating money to a fund from the IMA Sterling High Yield sector.
We have also decided to remove Royal London UK Government Bond and Royal London Index Linked Gilt from our various models, as we continuing reducing client exposure to gilts and shift our focus towards international fixed income instead.
We are confident that these various changes will be in the best interests of our clients as we enter the New Year.
Our latest Investment Outlook report for the first quarter will be published at the start of January and our clients will then receive advice about rebalancing their portfolios in the usual way, typically at their annual review meeting with an Informed Choice Financial Planner.
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